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Wednesday, July 11, 2012

SPX Update: Market Reaches Critical Decision Point

Yesterday, I took an educated guess at the short-term path the market would follow, and, a little bit to my surprise, it followed the path I laid out almost perfectly. It's now decision time for this market. I continue to feel that a new high above 1374 would fit the pattern better -- and there are some signs that the bulls still have control of this market. The decline did not come close to matching the furor of the last rally leg, and has been quite orderly. This fits the pattern of a corrective B-wave decline.

The market has nearly reached the lower boundary of the trend channel, and this is where bulls need to make a stand and turn things around if they want to maintain their hopes for new swing highs. If the market fails to bounce here, we could start to see some real fireworks from the bears.

I find it interesting that the charts have reached an inflection point just in time for the release of the Fed minutes on Wednesday. One could see
things going either way with that news release (and with the charts) -- lots of QE talk could
provide the thrust for that last high; lots of QE
opposition could provide the thrust for an actual 3rd wave decline. In fact, I recall that the Fed minutes, and perceived lack of support for a new QE program, seemed to be a factor near the last cyclical market high.

Funny how
that works, though -- the charts are clearly approaching a decision point... and
once again, it lines right up with potential "game changer" news. It is also interesting that the pattern is ambiguous enough to allow for either outcome.

For the short-term, the pattern would look best with a slightly lower low, followed by a solid bounce. The lower low isn't required to complete the pattern, however -- but the ideal target for the decline (assuming it isn't the more bearish alternate count) would be roughly 1333, which also "just happens" to line up with the lower blue trendline.

Another factor which favors the bulls is the strength of the rally vs. the strength of the decline. Note how much more headway the bulls made in a few days than the bears did -- this suggests the bulls still have firepower. However, sustained trade beneath the blue trendline would begin to shift the odds in favor of the more bearish alternate count.

Regardless of which short-term resolution the market has planned, the intermediate picture currently only has one preferred outcome, and that is for the market to head into the 1100's. It would literally take a moon-shot from the market, right here and now, to change this pattern into something bullish -- and that currently appears to be very low probability.

For contrast, the bigger picture chart below has been labeled with the alternate count, and also outlines a very bearish pending sell trigger.

In conclusion, the overall pattern would still look better with a new high above 1374, the first target for which is 1375-1380. In a perfect world, I'd actually like to see a new high that slightly overthrows the upper line of the bearish rising wedge shown in the chart above. However, the market has reached a critical inflection point now, and the bulls do need to turn this market fairly quickly to maintain their short-term hopes. Trade safe.

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